The present invention is directed to a method and apparatus for the commoditization of service contracts allowing various vendors to be ranked based upon their intrinsic strength (intrinsic rating) and on their ability to deliver on a specific project (Two-Way Rating). The present invention is also directed to a method and system for pricing technology delivery insurance based upon the failure/default by a vendor. This assessment and ranking will allow insurance companies to structure and underwrite insurance/surety contacts, by allowing insurance companies to assess the comparative risk inherent in specific vendors hence giving the insurance company/guarantor the ability to price risk based premiums or fees and the ability to underwrite and monitor vendor performance.
Historically, if a particular customer wished to have a vendor to provide a particular product for the customer, such as erecting a particular structure, the customer would publicize this fact to the appropriate industry along with various parameters required for the vendors to prepare a proposal for erecting the structure. The customer would then review the proposals received from the vendors for the purpose of choosing the particular vendor to which a contract is awarded for erecting the structure. Generally the choice of the vendor will be based upon the total cost of the project, the time it would take to complete the project, as well as various other factors, such as the reliability of the particular vendor. As can be appreciated, at least partly basing the awarding of a large contract on the perceived reliability and trustworthiness of the vendor could result in a non-timely completion of the project as well as the project being delivered over the agreed upon cost if the perceived reputation of the vendor was unwarranted.
Additionally, along with the subjective nature of the decision to reward a contract, the contract process itself was rather time consuming. Once a customer decided to embark upon a particular project, various vendors must be alerted to the existence of such a project which typically occurred by the customer mailing the request for proposals (RFPs) to various potential vendors or publishing the request for proposals in industry publications. As can be appreciated, recent advances in technology have resulted in lessening the communication time between a customer and a potential vendor by the utilization of the Internet. Although the current invention does not depend on the Internet for its success.
Additionally, an auction concept has permeated corporate thinking to the degree that most sectors are now attempting to turn their buying or selling decisions into a bidding exercise where buyers and sellers either are aggregated into a virtually monopsony (single buyer) or monopoly (single seller). Although the reverse auction concept would work well for generic products and commodities, it is yet to be applied to the burgeoning technology industry which includes software development contracts.
To consider a reverse auction in any field, it is necessary to commoditize the service contracts and apply objective standards to analyze the pool of bidders. Once standards have been applied to neutralize the impact of extraneous variables, the normal interplay of supply and demand will yield price discovery. However, while it is relatively easy to make a well known substance such as wheat or corn into a commodity, the commoditization of a less quantifiable concept such as technology services becomes problematic. The present invention describes a formula and business model that makes this possible. Generally, once the various proposals are received by the customer from the vendors, the contract is awarded to the vendor whose total cost is the lowest or who can provide the product most quickly, or both. While on the surface, it would appear that it would be obvious to award the contract based upon the cost or time of delivery. However, this yardstick would not take into account the performance of the vendor. Rather, it is important to determine whether the vendor can perform the contract in the time period required or for the agreed upon cost. Therefore, it is important to be able to rank the reliability of the vendors and factor this reliability into the time of performance and the cost of the project to better compare the vendors. This will provide to the client both a nominal bid and a risk-adjusted bid (which includes the component of performance strength and delivery within it). Ability to rate performance itself is derived from the analysis of vendor capabilities using the intrinsic and the two-way rating process at the heart of this invention. Furthermore, with respect to rather complex contracts a better comparison can be made if the contracts are partitioned into various independent modules/phases for the purpose of comparing the bids, abilities and the risk inherent in specific vendors. The understanding of the risk inherent in various components of the contract will allow the insurance company/guarantor to underwrite technology risk, which is the ability of the vendor to deliver on the technology that he is contracted to deliver.
Various prior art patents address several aspects of the prior art. For example, U.S. Pat. No. 6,088,678, issued to Shannon, describes a process simulation technique using benefit-trade matrices to estimate schedule, costs and risks. As illustrated in FIGS. 2 and 3, a process simulation tool is utilized employing benefit-trade matrices 21a-21f and various steps during a design process. The benefit-trade matrix comprises a multiple variable look up table embodying history data relating to a particular step indicative of weights of schedule, cost and risk elements as well as user-input rating data. As described in column 7, lines 5-20, if a risk metric is scored high, the user may decide to forego simulation and take the risk that a mistake was not made, or make the appropriate trade off if a mistake was made. However, while it is clear that the patent to Shannon does take into account risk, the purpose of this accountability is to determine whether a simulation is cost effective. There is no suggestion that this risk be applied to various vendors. Indeed, it would appear that this patent is directed to a technique in which a schedule is determined by a single vendor used to calculate resources required to complete a particular project. There is no implication of an insurance structure within this.
U.S. Pat. No. 6,195,646, issued to Grosh et al shows a system and method for facilitating the valuation and purchase of information. This patent acknowledges that at present, few techniques exist for the determination of what to charge for any particular data. As indicated in column 2, lines 1-10, the patent to Grosh et al is directed to facilitating the upcoming commoditization of information. Therefore, while the patent to Grosh et al does recognize an impending trend in the industry, it does not address the manner in which this trend is to be utilized to obtain data relating to various contracts to be awarded.
U.S. Pat. No. 5,734,890, issued to Case et al, illustrates a system and method for analyzing procurement decisions and customer satisfaction. Although this patent acknowledges that the vendor""s qualifications are important in making procurement decisions, it does not provide a clear indication of relatively ranking these vendors based upon the time of performance and cost of a particular project as well as partitioning the product when making this determination (or of structuring an insurance contract from this).
U.S. Pat. No. 5,765,138, issued to Aycock et al, relates to an apparatus and method for providing interactive evaluation of potential vendors. Vendor requirements are selected for vendor qualification and these vendor requirements can be assigned a relative weight on the basis of project objectives. A selected group of requirements defining quality control standards are supplied in an RFP/RFQ as objective criteria to be met with a desired vendor in a project. Upon receiving the responses, each response is provided with a scaled score. By correlating the scaled score with the relative weight of each of the requirements with respect to the project objectives, the patent to Aycock et al enables an objective evaluation of the supply responses in order to determine a supplier maturity level. It is important to note that the analysis described in Aycock et al is based primarily upon responses received by the particular vendors. Additionally, this patent does not describe a system in which the contracts are partitioned to better compare the vendors during the selection process, allowing an insurance company/guarantor to underwrite the technology risk. Also, this patent does not address the vendors ability to deliver on a xe2x80x9cspecific contractxe2x80x9d.
None of the patents described hereinabove anticipates or suggests a method or system in which vendors are rated on their generalized past performance as well as specific past performers relating to the type of technology forming the subject of the contract bid. This rating system would be normalized in a manner in which all of the vendors bidding on the contract constitute the entire universe of bids for that contract. This rating system would be used to provide a good measure to compare nominal bids of the contract by providing the risk-adjusted bid of the vendor in addition to the nominal bid. The rating system would be used to determine an insurance premium insuring the customer against default for non-timely performance of the contract.
The deficiencies of the prior art are addressed by the present invention which is directed to a method and system for partitioning contracts into various independent modules/phases, allowing the complexity of each module/phase to be determined as well as utilizing these individual modules/phases in the assessment of a particular vendor""s capability of delivering the entire contract in a timely manner as well as determining the ultimate cost of the project. This creates a structure allowing the insurance company/guarantor for the first time to underwrite risk inherent technology contracts and price a risk-neutral premium associated with this risk, that is, the relative ranking of vendors based upon their ability to deliver and the relative risk inherent in a particular vendor. The distinguishing aspect in determining value, as opposed to price, is to objectively quantify the relative risks associated with using individual vendors. This is because second-tier vendors will be usually less expensive than first-tier vendors, but the risk is greater. Choosing the lowest bidder could turn out to be a mistake. Therefore, the risk-adjustment applied to the nominal bid submitted by a vendor is the key to accurately assessing the risk in a particular vendor. The system and method according to the present invention can restore parity between bids and compare them on a uniform scale familiar to commodities markets.
A score or ranking is developed for each of the vendors based upon the vendor""s historical reliability as well as normalizing the vendor""s ranking with respect to the other vendors for the purpose of determining the appropriate vendor. This is known as the intrinsic rating. A two-way or extrinsic rating is assigned to each project-vendor combination as well as establishing a subsidiary risk measure. The two-way rating bases the assessment of the technology vendor or the ability to execute and deliver on a particular project. While the intrinsic rating of a particular vendor might be high, the two-way rating may be low if the vendor does not have the relevant expenditure that a particular project requires. The two-way rating is a numerical ranking that addresses both the vendor to which it is assigned and a particular project under consideration. One vendor may have a relatively high two-way rating for one project, and a relatively low two-way rating for another. The intrinsic or standalone ranking is developed reacting to the vendors track record in the industry. Both these tools the 1) intrinsic rating and 2) the two-way ratings are used for the process of vendor selection. The intrinsic rating is a numerical ranking assigned to a vendor depending solely on the vendor""s a-priori characteristics regardless of the project under consideration. Therefore, any vendor only has one intrinsic or standalone rating and one two-way rating for a particular project which is the vendor""s ability to deliver on a specific project. The intrinsic and extrinsic rankings allow the customer to select the best vendor suited to the particular project. The ratings for both the intrinsic and the extrinsic two-way ratings are between 0 and 1 with 1 being the highest score attainable.
Furthermore, the intrinsic ranking can be modified by the customer to produce a modified intrinsic rating. The modified intrinsic rating is the rating of the vendor (as modified by the customer) based on on-going vendor performance.
Furthermore, the nominal bid submitted to a customer by a vendor is adjusted using the vendors""s two-way rating providing a risk adjustment factor which incorporates both the time to delivery of the vendor and the cost per day for the vendor into its parameters to adjust the nominal bid. For a very weak vendor the risk-adjustment could be significantly high and for a strong vendor the risk-adjustment would be marginal or low.
Once a particular vendor is chosen utilizing the criteria of the present invention, the probability that the vendor would default on the performance of the contract as well as the premium for obtaining insurance for the performance of the contract can be established.
The present invention therefore is also directed to a system and method of obtaining operational risk insurance in the context of outsourcing technology development or technology contracts. A suitable structure is established whereby the interest of the insurance company, the customer and the primary vendor are simultaneously preserved. This vendor can be located in the United States or any country of the world.
Therefore, it is an object of the present invention to develop a system and method of partitioning a contract, such as a technology/software contract into independent modules/phases.
It is yet another object of the present invention to provide a system and method to develop a scoring/rating for each of the vendors.
It is still yet another object of the present invention to develop a matrix for comparing vendors bidding on a single contract. The matrix comprises the partitioning of the technology contract, the vendor intrinsic rating, the vendor two-way rating, the risk-adjusted bid and the insurance/guarantee premium attributable to a particular vendor risk and delivery (xe2x80x9cthe CTO matrixxe2x80x9d).
It is still another object of the present invention to develop a system for providing risk adjustments to the bids of each of the vendors.
It is still another object of the present invention to develop an algorithm for determining the price of a premium for insurance/guarantee coverage for the performance of the vendor.
Other objects and characteristics of the present invention will be made apparent from the description below and the attached drawings.